Financial Times

Credit crunch hurts all


Reverberations of the global financial crisis continue across all sectors in Sri Lanka with commodities, garments and banking feeling the brunt of it. Tea brokers say the crisis will continue to hit prices and exports. Garments, earlier struggling with the GSP + issue, is seeing some factory closures and reduced shift work while a request has been made to reduce the number of working days per week.

Companies are perhaps worst off with corporate results of companies being below investor expectations. This week stockbrokers said close to 90% of companies reporting their results either for the quarter ended 31 December 2008 or yearly results have shown around a 50 to 60% slump in earnings, year on year. Brokers said the bigger companies have been the worst off.

The tea trade says the global credit crunch will continue to hurt Sri Lanka’s tea trade this year with tea factories and traders struggling to raise cash. They say the strong rupee is also working against the local tea sector making our teas more expensive than that offered Indian and Kenyan as these countries have de-valued their currencies. A new round of wage negotiations between plantation unions and plantation companies, due in coming weeks, would also impact on prices and costs.

Despite some positivism over the proposed $1.9 billion stand-by facility that Sri Lanka has requested from the International Monetary Fund (IMF), the markets – stocks and money – are reacting cautiously concerned about possible conditions attached to the loan.

“Will there is tough conditions?” one money broker asked. Central Bank Governor Ajit Nivard Cabraal says there are no strict conditions while the opposition and economists say IMF loans come with strings attached, one of the reasons why the present government didn’t opt for IMF funding three years ago.
The inter-bank or money markets, where banks raise or lend cash to settle daily needs, hasn’t also reacted to the injection of some Rs 9 billion by the Central Bank after reserve ratios of banks were reduced.

With the rupee coming under pressure in the markets (more rupees to buy dollars), the Central Bank has been pumping in around US$ 10 million daily to keep the rupee strong – and reduce the cost of key imports. However brokers say the market is still short of liquidity in the region of Rs 8 billion daily by banks either needing cash for daily needs or to maintain compulsory reserves. The US dollar hit a high of Rs 116 per dollar two weeks, the highest ever recorded, and eased after the Central Bank pumped in dollars.

Stockbrokers said while the IMF loan could boost some confident in the market, the global crisis is still lingering in the market and weak corporate results are also not helping. The food and beverage companies are also hit by the 1% Nation Building Tax effective from last month which would affect revenues. For this sector and supermarkets, this is a big dent in income as they depend on volume sales with very small margins.

The opposition is hitting hard at the government for going with the begging bowl to the IMF, an agency that was once not wanted. However the crisis at hand is so severe that an IMF package – with or without conditions – is inevitable. Senior Minister Dr Sarath Amunugama, who has represented the government at IMF meetings in Washington, says this time the loan is different to previous stand-by arrangements.
The Central Bank, in a bid to instill public confidence in finance companies after the Golden Key fiasco triggered problems in all finance and deposit-collecting companies in the Ceylinco Group, has offered a stimulus package for ailing companies.

However, sources in the finance industry, say most finance companies are unlikely to take it and it may apply only to Ceylinco companies. In the meantime, bankers are questioning the wisdom of appointing management councils and bailout experts to some of the failed companies, saying they would get a fat fee and eat further into the shrinking reserves of these institutions. In most cases, non-banking institutions registered by the Central Bank like finance companies, leasing companies, etc are almost like banks except they don’t issue cheque books or issue letters of credit.

These units offer NRFC accounts, collect deposits and provide loans but are subject to a minimum capital of Rs 200 million whereas banks must have a minimum capital of Rs 2.5 billion! “When these companies fail, the Central Bank has to go and bail them out,” one banker said, suggesting that these institutions should also have a much higher minimum capital like banks – because they almost operate like banks.

The crisis at hand has triggered a whole series of complex issues which need rational and pragmatic solutions with the support of all. There are dozens of seminars and workshops on what went wrong and what must be done but the need of the hour is the creation of an apolitical task force made up of government and private sector specialists drawn from Central Bank, Finance Ministry, banks, economists and even social scientists to examine the crisis, short and long term repercussions and remedies. We made this request some weeks back and we make it once again.

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